What’s window dressing?

Managers use window dressing to make their financial figures look better than they are.

Window dressing deceives shareholders and investors by showing a positive company performance.

Window dressing may be used to make financial information appealing to shareholders who lack operational knowledge.

Explanation

Companies must publish accounting information per legislative and professional requirements.

These standards regulate account structure, content, publication dates, and figure presentation.

Due to the intricacy of governing body laws and regulations, managers and management teams can always interpret them to their benefit.

Managers, either alone or with directors, bend, re-interpret, or ignore the regulations to improve their financial statements by taking advantage of the ‘opportunity of interpretation’.

The information provided based on discretion (interpreting or misinterpreting rules and regulations) appears true but is not.

Through window dressing, companies can provide a rosier-than-truth picture to information users.

Why Dress Windows?

Businesses utilize window decorating for several purposes. Here are some:

To prevent company takeovers. Managers may upprice the company’s assets, notably brands. Doing so boosts the company’s assets, discouraging bidders.

To boost share valuations by posting larger profits (e.g., revaluation profits as revenue). Managers portray good performance, but it may not be true.

To satisfy shareholders by posting larger earnings and encouraging them to approve accounts without interrogation at the Annual General Meeting (i.e., to run the meeting smoothly).

To boost takeover revenue. This act is fraudulent, but companies defend it with acceptable statistics.

Gain or keep institutional investors’ support. Creative accounting inflates earnings or manipulates asset and liability data to hide negative performance trends.

Maintain or gain credit lines. Strong (managed) liquidity encourages business creditors.

Common Window Dressing Methods

A simple approach of window dressing without creative accounting is presenting statistical information to boost an enterprise’s performance.

A high base figure may be utilized for a graph’s vertical axis. This exaggerates increases, giving the impression of great improvement that isn’t so.

Negative Window Dressing Dimensions

Get institutional backing

Increase takeover revenue

Credit score improvement

Positive Window Dressing Dimensions

Prevent takeovers

Enhance share values

Obtain shareholder approval

How to Dress Windows

The easiest and most prevalent form of window dressing is presenting statistical data to improve an enterprise’s performance to clients, shareholders, or investors.

Consider a firm with one successful division and five unsuccessful.

Poor performance data is purposely overshadowed by good ones. This presentation hides performance in numerous ways:

A high vertical axis base figure is used by the company to emphasize a desired increase in a graph.

Sales appear to have improved greatly at first glance. However, sales may have increased by 5%.

By publicizing the positive performance of one division (e.g., in one market), the company hides its poor performance in other divisions.

The stats don’t adjust for inflation or compare to competitors’ performance.

Window decorating goes beyond data presentation.

Using creative accounting, figures can be’massaged’ to misrepresent them. The following sections describe window dressing examples.

Brand Revaluation

Recently, brands have become much more valuable. Many companies do this to strengthen their balance sheets by revaluing their brands.

Brand valuation increases business strength, at least on paper. Revaluations to defend takeovers usually increase brand value.

The organization’s balance sheet shows the brand (asset) revalued at $50.00 from $25.00. The intended bidder will reconsider a takeover due to this.

The owner, not the buyer, knows the brand’s genuine value.

Hide Bad Investments

Profit and losses can be increased or decreased depending on asset losses. Another method of window dressing is to hide bad investments.

Leasebacks and Sales

Sale-and-leaseback deals boost liquidity. Such operations begin with selling major capital assets to boost cash flow.

Revenue generation is unaffected by leasing back the same asset at a revenue-chargeable cost. Additionally, significant monies are allocated for development.

Sale-and-leaseback arrangements are now commonplace. The approach is even used to improve short-term cash circumstances and current asset ratio and liquidity.

If this is done for short-term liquidity, long-term business performance should be questioned.

Such a method is legal, ethical, and within accounting practices (as guided by applicable governing organizations).